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Saturday, August 22, 2009

My Secret Mutual Fund Investing Strategy Revealed

As a financial planner I was probably a little over-cautious about making sure that my clients did not lose money. But then, rule number one was that clients don't like to lose money. So, I developed a mutual fund investing strategy that I never shared with anyone ... until now. I'll tell you how it works by way of a true story.

In 1987 I sat down with a new client who had about $100,000 in an IRA, 100% of which was invested in stock funds. Jeff was a dentist, and being self-employed wanted help because he really didn't know how to invest, and his IRA was going to be a significant part of his future retirement security.

At that point in time I was very uncomfortable with the stock market. Jeff was very uncomfortable with his present adviser because he was losing money with him.

He wanted me as his adviser, and wanted to rollover his IRA as a first step in our new relationship. I told him that I was with him all the way, but first there was one thing I wanted him to do as I handed him the telephone. I had his current mutual fund statement in front of me, and had him dial the toll-free service number.

"Tell them to transfer all of your money to their safe money market fund," I suggested, and he did. I wanted him to do this because, like I said, I was not comfortable with market conditions and a rollover can take weeks before the paperwork goes through and the transfer of money actually takes place. I did not want him to lose his shirt in the interim.

I set the paperwork up so that all of the money that went into his new IRA with me went into OUR money market fund. This transaction would pay me exactly zero in commissions, because money market funds are very safe and very liquid and flexible. However, they pay the representative (me) zero.

Five weeks later the transfer of money took place, and it occurred at the end of the worst trading day in the history of the U.S. stock market. Stocks lost about 23% that day. Jeff saved well over $20,000, because he had been sitting safe in a money market fund when it happened.

Now, here's the investing strategy we then pursued; and how I subsequently made some commission for my efforts.

Jeff had $100,000 safely tucked away in our money market fund, and this money could be moved around at will into any other fund in the fund family. When it moved into stock or bond funds, I made a commission. Plus, we set things up so that he had money flowing into his IRA automatically each month from his checking account as new IRA contributions.

All money flowing into his mutual fund IRA went into his money market fund.

We then transferred half of his $100,000 from the money market fund equally into four different stock funds, so that he was 50% invested in stock funds. Our goal was to get him up to 75% in stock funds, keeping all four stock funds about equal, over the next couple of years. To accomplish this I set things up so that money flowed from the money market fund into each of the stock funds each month. In this way he was easing into the market over time. This is called DOLLAR COST AVERAGING.

When we reached our goal of 75% stock and 25% money market, I turned off the spigot.

Our long-term investing strategy was to maintain the 75-25 ratio, and to keep the value of the four stock funds about equal. Whenever the numbers got out of line by a few percentage points, we simply moved money around to bring them back in line. In other words, we REBALANCED his portfolio periodically.

Two powerful investing tools were employed in our investing strategy: dollar cost averaging and rebalance. Plus, Jeff had maximum flexibility in managing his total portfolio.

courtesy of

1 comment:

  1. This strategy is called Value Averaging. You can read more about it at